New Retirement Realities: Five Ways Employers Can Benefit

Watson Wyatt Retirement Expert Testifies on Phased Retirement Valerie Paganelli, a Watson Wyatt senior retirement consultant, recently testified to the Special Senate Committee on Aging about the need for formal phased retirement programs. In preparation for the coming labor shortages, a growing number of employers would like to implement phased retirement programs to help them retain older, more experienced workers. However, Paganelli said certain federal rules and regulations make it difficult for employers to do so. For instance, Paganelli points to federal rules that generally preclude the use of qualified retirement plans, especially pension plans, to partially fund a phased retirement arrangement. The result? Pension plans are restricted from distributing benefits to participants prior to severance of employment or attainment of normal retirement age. "The traditional three-legged stool of retirement income made up of Social Security, employer pension and personal savings is no longer the appropriate financial planning framework for future retirees," said Paganelli. "Phased retirement and the role of continued wages from active employment will become increasingly necessary as an added dimension to retirement financial planning."

In the media-depicted image of the ideal retirement, seniors in their 60s enjoy a life of total leisure — golfing, boating, and traveling. The message? Retirement means no longer having to work and finally having the time to pursue the pleasures of life.

But how realistic is that image for today's baby boomers? Not very. Longer life spans mean that people now have many more golden years ahead of them than previous generations enjoyed. That raises the specter of running out of money in later years. To ensure that this doesn't happen, baby boomers need to replace the 20th-century image of retirement with a new one. The good news is that the new image not only offers financial security, it also has the potential to make retirement far more fulfilling.

In my book, Live Long & Prosper!,¹ I describe the new realities of retirement. Two of these realities will significantly affect employers. The first, phased retirement — in which people opt to work at least part time into their 60s and 70s — will dramatically change the complexion of the workforce. The second, the importance of good health in retirement, will create a growing employee awareness of health and prevention issues. This awareness could have a major impact on reducing skyrocketing health care costs.

This article provides a snapshot of how retirement is changing and presents five steps that employers can take to fully leverage the new realities to enhance business success.

The trends are clear

For many reasons, retirement in the 21st century won't resemble the 20th-century vision of the golden years. For starters, people are living longer. According to the 2003 Age Vulnerability Index,² the percentage of the population aged 60 and older will increase from 16 percent in 2000 to 26 percent in 2040.

This expanding senior population faces serious financial challenges. Burdensome legislation and the demands of an increasingly mobile workforce have led many businesses to replace defined benefit (DB) plans with defined contribution (DC) plans. Heavy reliance on DC plans and DB plans with lump sum payouts, have made individual retirees more responsible for their own financial security during retirement.

Additionally, as a result of the expanding senior population, the number of workers per retiree is declining. This means that Social Security and Medicare benefits are likely to be significantly less generous in the future. Moreover, there is evidence that baby boomers haven't saved enough to finance the 25- to 35-year retirement that is implied if they stop working at the traditional retirement age.

So what?

Should employers care about what happens to people in retirement? Absolutely.

Many older workers will choose phased retirement for a number of reasons: they need the money, they need the medical plan coverage, they like to work or all of the above. That will certainly change the makeup of the workforce. Employers that align their employment and retirement programs with the needs of these workers can gain a competitive advantage by retaining a highly skilled, highly motivated senior workforce — good news in industries that face a shortage of employees with critical skills.

Furthermore, employers that encourage employees to ensure a comfortable, happy retirement by adopting a healthy lifestyle now and taking a more active role in their health care could substantially reduce their health care costs. Watson Wyatt research clearly shows that companies that set strategy based on quantitative analysis, engage consumers through information and tools and focus on health management and lifestyle behavior change are averaging 5 percent growth annually in their health care costs, compared with 15 percent for low-performing companies.³

Five steps employers should take now

Here are five steps that employers can take to align retirement programs and the work environment with the needs of older workers, and leverage the significant opportunities that the new retirement realities offer.

1. Understand retirement-related concerns and help employees plan accordingly. Most employees — particularly those approaching traditional retirement age — are concerned about building up 401(k) balances, managing their retirement funds so they don't outlive their savings and avoiding ruinous medical bills. Employers are ideally positioned to provide communication and education programs that help employees address these concerns.



2. Restructure work to support phased retirement. Older workers are looking for meaningful jobs, flexible schedules and reduced hours. Employers can apply what they have learned from accommodating working mothers to provide innovative work environments that meet this demand. Doing so encourages older workers to delay full retirement, so they continue to contribute to corporate success.



3. Revisit defined benefit programs. Research shows that DB plans attract and retain skilled, older workers and stabilize an aging workforce. There are simple, modest DB plan designs that meet human resources needs yet are not subject to the current legislative and regulatory uncertainty surrounding cash-balance plans. With proper design and governance, DB plans need not be a headache to administer and communicate, and financial volatility on financial statements can be managed.



4. Design programs that encourage good health. A large percentage of medical costs are related to lifestyle choices such as smoking, alcohol and drug consumption, exercise, stress and diet. Helping employees understand the value of a healthy lifestyle is a good first step. Forward-looking employers, however, can be much more aggressive by offering financial incentives for taking active steps to improve one's health.



5. Offer continued training and skill development. Continued learning is a characteristic of people who have successful, long lives. Employers that help older workers keep their skills current will reap substantial rewards as these employees continue to deliver superior performance in the workplace.

Conclusion

The way people view retirement is undergoing a major shift. That shift offers new challenges and new opportunities, not only for those approaching retirement age but also for employers. Older workers who phase into retirement and make healthy lifestyle choices can protect their financial resources and ensure that their golden years are both pleasurable and fulfilling. And employers that explore ways to help employees achieve a healthy, happy, financially secure retirement can benefit from the skills and wisdom of a smart, older workforce and keep rising health care costs in check.

Live Long & Prosper! Invest in Your Happiness, Health and Wealth for Retirement and Beyond, by Watson Wyatt Worldwide's Steve Vernon, defines a new model for retirement that includes part-time work and effective financial strategies for living a prosperous, fulfilling "rest-of-life." This new model calls for people working part time into their late 60s or 70s — or even longer — but doing work that is interesting and fulfilling. It also includes adopting a healthy lifestyle and implementing financial strategies that ensure retirees don't outlive their retirement savings.

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¹ Live Long & Prosper! Invest in Your Happiness, Health and Wealth for Retirement and Beyond, John Wiley & Sons, 2005, softcover $19.95 ISBN: 0-471-68344-2.
² Produced jointly by Watson Wyatt Worldwide and the Center for Strategic and International Studies.
³ Managing Health Care Costs in a New Era: 10th Annual National Business Group on Health/Watson Wyatt Survey Report 2005.